An increasing number of investors are betting that General Motors Corp. may be forced to seek bankruptcy protection within the next 12 months as it struggles with slumping sales and high health care costs for workers and retirees.
Concerns about the future of the world’s largest automaker are showing up in the credit default swaps market, where investors effectively buy insurance protection against defaults. Holders of GM debt who want to arrange a hedge against the risk that they won’t be repaid are finding that the cost of buying the protection has risen dramatically in recent days.
“The markets are telling you that more traders are starting to see a greater risk that a default scenario could happen sooner in time than later,” said John Tierney, a credit strategist at Deutsche Bank Securities in New York. “You cannot deny there is a pattern here.”
GM spokesman Jerry Dubrowski responded by saying the automaker has “no plans to declare bankruptcy,” and he noted that GM has about $19 billion in cash on hand. Beyond that, he declined to discuss recent pricing trends for credit default swaps. “Typically we don’t comment on stock prices or bond prices,” he said. “We don’t think it is appropriate to do that.”
At issue is the nearly $31 billion in debt related to GM automaking operations that ratings agencies already have downgraded to junk status, or below investment grade. Dubrowski said GM’s total debt, including debt sold by its General Motors Acceptance Corp. unit, now stands at $276 billion.
Michiko Whetten, a quantitative credit analyst at Nomura Securities International Inc., said GM debt had previously never traded on an upfront basis. But now that it is, it puts GM in an unenviable category with Delphi Corp. and Delta Air Lines Inc. — other companies whose debt traded on an upfront basis ahead of their petitioning for bankruptcy.
Auto parts maker Delphi, once owned by GM declared bankruptcy in October, and Delta, the nation’s third largest carrier, went bankrupt in September.
GM’s outlook in the credit default swaps market took on a bleaker tone after last week’s disclosure by GM that it plans to restate its earnings for recent years. GM said its 2001 earnings were overstated by approximately $300 million to $400 million, but the final amount hasn’t been determined. GM plans to issue the restated earnings for 2001 and any subsequent years before it issues its 2005 annual report next year.
Is this where I disclose that I don’t own any GM stock?
I’ve probably said this before, but I predict that within 10 years a Chinese company will buy GM and gut the company, essentially only buying the trademarks. And within 15 years Ford would have been bought and gutted by a European company. Thus, our only exports will be agricultural. It’s amazing how things come full circle.
Ima,
I agree that what you say is a plausible scenario. But what do you see as the cause? I (IMHO) lay it at the feet of labor unions.
#2 Robert: No the cause is incompetent management. When all is said and done they are in charge. Where are the GM hybreds?
Well, it’s certainly incompetent management. The US automobile industry is reactionary not pro-active. It’s hard to survive when you’re always playing catch-up to everyone else. We all assumed they learned their less from the 70/80s but it’s apparent they didn’t.
But it’s also our labor and healthcare costs. There is simply no way GM could compete on price with China. In the coming years we’re going to see cars coming from China at about half the price. They’re going to look nearly identical to our cars. Sure the quality will be low, but most drivers only keep their cars about 5 years anyway.
Remember when DVD players used to cost about 600 bucks? Now they cost about 30 bucks. Heck, I find it hilarious that China can make and sell a DVD player for a profit that costs LESS than what PowerDVD or WinDVD sells downloadable DVD players for!
China is all about turning an industry into a commodity. It’ll happen to cars just like it happened to electronics, toys, etc.
Although high labor costs are a part of the story, that is by no means the real reason for the decline of the american automobile maker. Remember the Chrysler bailaout in the late 70’s and early 80’s? The same reason back then could be found for that collapse: cars that were not popular or in line with market needs. The american companies were offering either muscle cars or cheap trash like the Pinto, while the Japanese companies were offering same priced but better cars. The oil crisis spoke, the buying market spoke, and the American car companies basically died.
Today it is much of the same. The American market has moved away from SUV’s, because they are expensive to purchase, expensive to operate, difficult to drive in cities, and just plain politically incorrect (as they should be). So the smaller, more efficient car is back, with the big hit being the hybrid. And of course, it is not offered by the American manufacturers, which continue to produce passe ‘monster trucks’ as their main line. Toyota has the insight to convert their entire line of consumer vehicles to hybrids, yet American manufacturers areproducing exactly zero models.
Bad planning, bad leadership, lack of insight, quality as an afterthought… they all define American car manufacturing. I think that it is very telling that a large segment of Americans will flatly state that they will not buy an American branded car.
All this supported by a president that intentionally killed government backing into research in hybrids, instead looking at the longer range goal of Hydrogen, a goal that is laudable, but which will benefit only foreighn manufacturers, because there will not be ANY American manufacturers left by the time that Hydrogen becomes reality. (Does this Prez make ANY right choices?)
Robert: So a bunch of blue collar laborers outfoxed a group of Harvard MBAs at the bargaining table. Not once, but over and over to the point where GM may be insolvent. Goodness. Seems a college education is highly overrated.
I guess I shouldn’t make it sound even scarier, Fish; but, China has already launched into the same quality-upgrade pattern the Japanese did in the late 60’s. They’re importing experts in every intellectual and scientific discipline in the world — to set up and lead new universities and new departments in those universities.
They have projects already on flow to design their own cpu’s and computer components. Initially, for domestic consumption; but, I doubt if you think globalized markets are going to revert for any reason. I don’t.
Great one Don!
It is intersting to watch the pendulum swing(s).
The fever of SUV-madness is finally breaking.
Many of the people who said it was nobody else’s business if they wanted to afford a gas-guzzler are now whining they’re tired of paying that premium.
Women who didn’t want to drive a station-wagon (like their mothers) opted first for mini-vans (the previous pendulum-swing). But when they didn’t want to be stereotyped as “Soccer Mom’s” they started buying SUVs – to ‘protect’ their children if they had an accident.
Ford was closely-watched when it released the re-designed F150 series – their cash-cow – because if it flopped their profits would tank.
SUVs were such a high-markup segment that EVERY brand came out with one – even Porshe. Heh, was that the “jump the shark” moment for SUVs? 🙂
American companies built SUVs, while Toyota learned from a couple-generations of Prius – and sewed-up key patents for the technology.
Ford was able to buy Volvo – and has a large (?) stake in Mazda – but now has to license Hybrid-technology from Toyota.
And when GM was able to sell its stake in Subaru, Toyota bought it.
Europeans have seen what a fiasco the Daimlier buyout of Chrysler turned into, and the Chinese saw how big a nerve they struck when they made an offer for Unocal.
I would be surprised if any buyouts take place. Unless it is Kerkorian doing the “gutting”, not a Chinese company. 🙁
Blaming labour costs is poorly thought out and unsubstantiated arguement.
Many first world countries have economies that have a comprehensive social security system, higher wages than the USA and do not rely on their government to support big business with protectionist policies.
The problem is that American car manufacturers have languished in a market that has been big enough to grow their corporations and have a government that has emphatically supported and protected them. This is not a true free market economy, and the US auto industry is sufferring as a result of this attitude. They have become uninspired, over confident and lazy.
I buy Japanese. The quality is much better. It is more reliable. It is cheaper to run. My SUV does not have power everything and is not designed for the morbidly obese.
GM’s only hope (two words):
Unversal Medicare
(something a guy named Clinton tried to put in)
This is partly why GM’s plants in Canada are not only efficient producers but also have the highest quality of any automotive plants in the western hemisphere.
“the Chinese saw how big a nerve they struck when they made an offer for Unocal”
You’d be surprised how much things can change in a decade.
I have always thought it was funny that the automobile busness is (almost) always portrayed as the US’s “big three” versus the Japanese or European automakers, when there is a lot of investing in “competitors”.
GM has: done deals with Suzuki (Geo, or was that with Daihatsu?), Toyota (NUMMI – Pontiac Vibe/Totyota Matrix), recently sold their stake in Fuji Heavy Industries (Subaru), and recently swung a deal to aquire some Honda V6-engines for Saturn’s SUV (and in return Honda gets some small engines built by a GM-controlled Korean manufacturer). In Europe they have the Opal division, and bought 50% of SAAB.
Ford has had a stake in Mazda for years, and more-recent purchases of Volvo, Land Rover (from BMW!), and Jaguar.
Chrysler had a long-running “partnership” with Mitshubishi, before “merging” with Daimlier.
I’m sure thats only part of the global picture, but the British and Swedes must be miffed that their auto industries have been bought by “off-shore interests”.
GM’s CEO said, as late as August this year, that there was no market for hybrids.
When you get the “low interest” financing at a dealership, the manufacturing division pays the finance division for the difference between a market rate loan and the low interest loan. This means that something like $1,000 to $2,000 moves from one pants pocket to the other. So when GM, or Ford, is claiming that they are losing $1,500 per car, they really mean that they just paid GMAC, or Ford Credit, $1,500.
Back in the 80s there as a Ford ad campaign about Excuse me! You’re getting into my Buick. No! That’s my Oldsmobile. There were 4 cars that didn’t share a single piece of sheet metal, yet looked identical to most of the public. The blue collar guys on the assembly line didn’t design them, but folks will sure try to figure a way to blame the UAW for it.